Merchant Account vs. Payment Gateway vs. Payment Service Provider (PSP)

This guide will walk you through the captivating realm of payment processing, where we unravel the complexities of Merchant Accounts, Payment Gateways, and Payment Service Providers (PSPs). 

If you’ve ever found yourself wondering about the differences, advantages, and best fit for your business, you’re in the right place.

You’ll learn:

• Definition and Purpose of a Merchant Account
• How Does a Merchant Account Work?
• Types of Merchant Accounts
• Payment Gateway vs Merchant Account: What is the Difference?
• How Payment Gateways and Merchant Accounts Work Together
• What is a Payment Service Provider (PSP)?
• How PSP Works
• Merchant Account vs Payment Gateway vs PSP: A Detailed Comparison
• Merchant Account vs PSP vs Payment Gateway: Which is Best?

Let’s dive right in.

An Overview of Our Key Findings

• A merchant account is a specialized bank account that holds funds from customer transactions until they are transferred to your primary business bank account.
• Payment gateways serve as a secure bridge between customers, merchants, and payment processors, handling the encryption and transmission of payment data.
• Payment gateways and merchant accounts work together to facilitate seamless transactions, with the payment gateway authorizing and transmitting payment data while the merchant account holds and manages the funds.
• There are different types of merchant accounts, including high-risk and low-risk accounts, tailored to specific industries and risk profiles.
• Industries such as e-commerce, hospitality, and healthcare may require specialized merchant accounts to meet their specific payment processing needs.
• A payment service provider (PSP) combines the functionalities of both merchant accounts and payment gateways, offering a comprehensive solution for businesses.
• PSPs provide streamlined integration, multiple payment options, security features, and reporting tools, making payment processing more efficient and convenient.
• The choice between a merchant account, PSP, or payment gateway depends on factors like account stability, control over funds, pricing, processing volume, and specific business needs.

 

What is a Merchant Account?

A merchant account is a specialized type of bank account that enables businesses to accept payments from customers through various channels, such as credit cards, debit cards, and electronic payments. 

It serves as a virtual gateway that facilitates the smooth transfer of funds between a customer’s account and the merchant’s account.

The primary purpose of a merchant account is to provide a secure and efficient platform for processing customer payments. 

By having a merchant account, businesses can offer their customers multiple payment options, expanding their reach and improving customer satisfaction. 

Having a dedicated merchant account also ensures that funds from customer transactions are securely held until they are transferred to the merchant’s bank account. 

This adds an extra layer of protection and reassurance for both parties involved in the transaction. 

Additionally, a merchant account provides businesses with detailed transaction records, simplifying the process of reconciling payments and managing finances.

 

ALSO READ: Merchant Services Provider – What it is, Examples, and the Four Best Merchant Services Providers

 

How Merchant Account Works

When you set up a merchant account, you essentially establish a partnership with a payment processor, who acts as an intermediary between your business and the various payment networks. 

Here’s a simplified breakdown of how the process unfolds:

1. Customer Initiates Payment: 

It all begins when a customer makes a purchase from your business. They can choose to pay using a credit card, debit card, or other electronic payment methods.

2. Transaction Authorization: 

Once the customer submits their payment details, the transaction information is securely transmitted to the payment processor. The payment processor communicates with the respective card networks (Visa, Mastercard, etc.) to verify the validity of the card and the availability of funds.

3. Funds Transfer: 

Assuming the transaction is authorized, the payment processor transfers the funds from the customer’s account to your designated merchant account. This process typically takes a few business days, depending on the payment processor’s policies.

4. Merchant Account Deposit: 

The funds received from customer transactions are deposited into your merchant account, which is held with a partner bank or the payment processor itself. It’s important to note that the merchant account acts as a temporary holding account until you initiate a transfer to your primary business bank account.

5. Bank Account Transfer: 

At regular intervals, you can initiate a transfer from your merchant account to your business bank account. This step consolidates your funds, making them readily accessible for business operations and other financial needs.

6. Transaction Reporting: 

Along the way, the payment processor provides detailed reports and statements that outline the transaction history, including sales volumes, chargebacks, and other relevant information. These reports help you keep track of your business’s financial performance and reconcile payments effectively.

By having a merchant account in place, you streamline the entire payment process, offering your customers a seamless and secure payment experience. 

It eliminates the need for manual handling of cash and simplifies the accounting and record-keeping aspects of your business.

 

Types of Merchant Accounts

When it comes to merchant accounts, businesses are often categorized into different risk profiles based on various factors. 

These risk profiles determine the type of merchant account they require. 

Here, we’ll explore the two primary categories of merchant accounts: high-risk and low-risk. 

1. High-Risk Merchant Accounts

High-risk merchant accounts are specifically designed for businesses operating in industries that pose a higher level of risk and potential financial liability. 

These industries often experience a higher occurrence of chargebacks, fraud, or regulatory complexities. 

Some examples of high-risk industries include:

 

1. Online Gambling and Casinos: Due to the nature of the industry and associated legal restrictions, online gambling and casino businesses are considered high-risk. The potential for fraudulent transactions and chargebacks is higher in this sector.
2. Adult Entertainment: Adult entertainment businesses, such as adult websites or adult stores, are often deemed high-risk due to the sensitive nature of the content and the potential for legal and regulatory challenges.
3. Travel and Tourism: The travel industry, including airlines, travel agencies, and tour operators, falls into the high-risk category due to the high potential for chargebacks resulting from cancellations, delays, or customer disputes.
4. Nutraceuticals and Supplements: Businesses involved in selling nutraceuticals, dietary supplements, or herbal remedies are considered high-risk due to the regulatory complexities and the potential for unsubstantiated claims or customer dissatisfaction.
5. Debt Collection: Debt collection agencies, while essential for many businesses, are classified as high-risk due to the potential legal and ethical considerations associated with debt collection practices.

Obtaining a high-risk merchant account may require additional underwriting and due diligence from the payment processor to mitigate potential risks. 

These accounts often have higher processing fees, reserves, and stricter terms and conditions

Low-Risk Merchant Accounts

Low-risk merchant accounts are typically suitable for businesses operating in industries that pose a lower level of risk and have a lower likelihood of chargebacks or fraudulent activities. 

Some examples of industries that generally fall into the low-risk category include:

 

1. Retail Stores: Physical retail stores selling everyday consumer goods are considered low-risk. The in-person nature of transactions reduces the likelihood of chargebacks.
2. Food and Beverage: Restaurants, cafes, and food delivery services fall into the low-risk category, as they offer tangible products and services with limited opportunities for fraud or chargebacks.
3. Professional Services: Businesses offering professional services, such as law firms, consulting agencies, or accounting services, are generally regarded as low-risk due to the nature of their operations and the absence of tangible products.
4. Subscription-based Services: Subscription services, such as streaming platforms or membership-based websites, are often categorized as low-risk, as customers willingly enter into ongoing payment agreements.
5. Non-Profit Organizations: Non-profit organizations typically operate low-risk merchant accounts, as their transactions involve donations or contributions without the expectation of receiving physical goods.

It’s worth noting that certain industries may have specific payment processing requirements due to their unique characteristics. 

Here are a few examples:

E-commerce 

Online businesses that primarily operate through websites or digital platforms require e-commerce merchant accounts. These accounts integrate seamlessly with online shopping carts and provide secure payment gateways to facilitate smooth online transactions.

Hospitality

Industries such as hotels, resorts, and restaurants often benefit from specialized merchant accounts tailored to their needs. These accounts may include features like tableside ordering, split payments, and integration with point-of-sale (POS) systems.

Healthcare

Medical practices, clinics, and healthcare providers may require specialized healthcare merchant accounts. These accounts offer features like recurring billing for ongoing patient services and enhanced security measures to protect sensitive patient information.

 

Payment Gateway vs Merchant Account: What is the Difference?

While payment gateway and merchant account work hand in hand to facilitate seamless transactions, it’s important to understand the distinctions between them. 

Now, let’s break down the differences between a payment gateway and a merchant account for easy comparison:

 

 

Payment Gateway	Merchant Account
Serves as a secure bridge between the customer and the payment processor.	Acts as a specialized bank account for processing customer payments.
Handles the encryption and transmission of payment data, ensuring security and privacy.	Temporarily holds funds from customer  transactions until transferred to the merchant’s bank account.
Responsible for authorizing and processing customer transactions.	Verifies the validity of payment cards and availability of funds during transaction authorization.
May offer additional features such as recurring billing, tokenization, and fraud prevention tools.	Provides detailed transaction reports and statements for efficient payment  reconciliation and record-keeping.
Integration with various platforms, including websites, mobile apps, and point-of-sale (POS) systems.	Facilitates multiple payment options (credit cards, debit cards, electronic payments) for customers, improving convenience, and expanding reach.
Usually charged on a per-transaction basis or a percentage of the transaction amount.	Typically charged as a combination of transaction fees and account fees, which may vary based on the payment processor and provider.

 

How Payment Gateways and Merchant Accounts Work Together

Payment gateways and merchant accounts are integral components of the payment processing ecosystem, working in tandem to facilitate smooth and secure transactions. 

These two entities collaborate to ensure efficient payment processing for businesses by:

1. Customer Initiates Payment

The payment process begins when a customer initiates payment for goods or services. They provide their payment information, such as credit card details or other relevant payment credentials.

2. Payment Gateway Steps In 

The payment gateway enters the scene as the intermediary between the customer, the merchant, and the payment processor. It securely encrypts and transmits the customer’s payment data from the point of sale (POS), website, or mobile app to the payment processor.

3. Transaction Authorization

 The payment gateway forwards the encrypted payment data to the payment processor, which then communicates with the relevant card networks (Visa, Mastercard, etc.). The payment processor verifies the authenticity of the payment details, checks for sufficient funds, and ensures the transaction meets all security standards.

4. Merchant Account Comes Into Play

Once the payment processor authorizes the transaction, the funds are transferred from the customer’s account to the designated merchant account. The merchant account acts as a temporary holding account for these funds until they are settled and transferred to the merchant’s primary business bank account.

5. Payment Gateway Provides Feedback

Throughout the process, the payment gateway relays real-time transaction feedback to the customer and the merchant. This feedback may include status updates, confirmation messages, or any error notifications, ensuring transparency and improving the overall customer experience.

6. Settlement and Reporting

After a certain period, typically a few business days, the funds held in the merchant account are settled. The payment processor initiates a transfer to the merchant’s business bank account, consolidating the accumulated funds. This transfer may include the total amount from multiple customer transactions.

7. Transaction Records and Reporting

Both the payment gateway and the merchant account provide comprehensive transaction records and reports. The payment gateway furnishes detailed transaction logs, including timestamps, customer information, and transaction amounts. The merchant account offers statements, allowing businesses to reconcile payments, track revenue, and manage finances effectively.

 

 

 

 

What is a Payment Service Provider (PSP)?

A PSP is an all-in-one solution for handling your payment processing needs. It’s like having a knowledgeable partner by your side, taking care of the intricacies while you focus on growing your business. 

The PSP acts as a bridge, connecting you, the merchant, with the various payment methods and financial institutions involved in the transaction.

With a PSP, you gain access to a comprehensive suite of payment services and solutions. It simplifies the process by consolidating all the payment options into one streamlined platform. 

But the benefits don’t stop there! 

PSPs handle the technical aspects of payment processing. They provide the necessary infrastructure, including payment gateways, encryption protocols, and security measures, to ensure that your customers’ payment information is safeguarded.

Another significant advantage of partnering with a PSP is the flexibility and scalability it offers. 

As your business grows, the PSP can accommodate your expanding needs, adapting to changes in transaction volumes and supporting new payment methods or currencies. 

This scalability ensures that your payment processing infrastructure keeps pace with your business’s evolution.

Section 7: How Does a Payment Service Provider (PSP) Work?

As your business grows, the PSP can accommodate your expanding needs, adapting to changes in transaction volumes and supporting new payment methods or currencies. 

This scalability ensures that your payment processing infrastructure keeps pace with your business’s evolution.

Here’s the behind-the-scenes tour of the PSP’s inner workings!

Integration: 

When you partner with a PSP, the first step is integrating their payment infrastructure with your existing systems. This integration can occur through various methods, such as API (Application Programming Interface) integration, plugins for popular e-commerce platforms, or customized solutions tailored to your specific needs.

Payment Collection

Once the integration is complete, the PSP provides you with the tools and mechanisms to collect payments from your customers. Whether it’s an online purchase, an in-store transaction, or a recurring subscription, the PSP handles the processing of customer payments across different channels.

Payment Data Transmission

When a customer initiates a payment, the PSP securely transmits the payment data from the point of sale (website, mobile app, or POS system) to their secure payment gateway. This transmission involves encryption protocols that protect sensitive information, ensuring privacy and security throughout the transaction process.

Transaction Authorization

The PSP’s payment gateway acts as the intermediary between your business, the customer, and the relevant payment networks. It sends the payment data to the respective card networks (Visa, Mastercard, etc.) or alternative payment providers, seeking authorization for the transaction. This step involves validating the card details, checking for sufficient funds, and confirming the transaction’s legitimacy.

Funds Transfer and Settlement: 

Once the transaction is authorized, the PSP facilitates the transfer of funds from the customer’s account to your merchant account. This transfer occurs within the payment processing infrastructure, ensuring the secure movement of funds. The PSP holds the funds temporarily in the merchant account until they are settled and ready for withdrawal or transfer to your business bank account.

Reporting and Analytics: 

Throughout the payment process, the PSP provides you with access to comprehensive reporting and analytics tools. These tools enable you to track transaction volumes, analyze sales data, and gain valuable insights into your business’s financial performance. This information empowers you to make data-driven decisions, optimize your payment processes, and drive business growth.

Support and Maintenance 

A reliable PSP offers ongoing support and maintenance to ensure smooth payment operations. They handle technical updates, security patches, and regulatory compliance, allowing you to focus on your core business activities without worrying about payment processing complexities.

 

Merchant Account vs Payment Gateway vs PSP: A Detailed Comparison

Here, we’ll conduct a comparative analysis of three key components in the payment processing landscape: the Merchant Account, the Payment Gateway, and the Payment Service Provider (PSP). 

Let’s explore their differences across various crucial aspects.

1. Account Approval

• Merchant Account: When it comes to account approval, merchant accounts typically undergo a more rigorous screening process. This involves assessing your business’s financial stability, creditworthiness, and compliance with industry regulations. The approval process may take longer, but it ensures a higher level of security and stability for your payment processing.
• Payment Gateway: In contrast, payment gateways focus more on technical integration and compatibility. They provide quicker account setup, allowing businesses to start accepting payments swiftly. However, it’s important to note that payment gateways often require a valid merchant account to operate effectively.
• PSP: Payment Service Providers (PSPs) strike a balance between the two. They offer streamlined account approval processes, combining the necessary financial and technical considerations. PSPs aim to provide businesses with an efficient onboarding experience without compromising on security and stability.

2. Account Stability

• Merchant Account: Merchant accounts offer a higher level of account stability, as they are directly tied to your business’s bank account. This stability ensures consistent fund transfers and reduces the risk of payment disruptions.
• Payment Gateway: Payment gateways focus on the secure transmission and authorization of payment data, rather than directly handling the movement of funds. As a result, they rely on the stability of the connected merchant account for seamless payment processing.
• PSP: PSPs provide a stable payment processing environment by seamlessly integrating merchant accounts and payment gateways. They bridge the gap between account stability and transactional efficiency, offering a comprehensive solution for businesses.

3. Merchant ID

• Merchant Account: With a dedicated merchant account, you receive a unique Merchant ID (MID). This MID serves as your identification within the payment ecosystem, enabling you to track and reconcile transactions more effectively.
• Payment Gateway: Payment gateways do not typically assign separate Merchant IDs since they primarily focus on facilitating transaction authorization. They rely on the connected merchant account’s MID for transactional identification purposes.
• PSP: PSPs may provide businesses with a consolidated view of transactions and associated Merchant IDs, incorporating the MID from the merchant account and the payment gateway. This unified approach simplifies transaction tracking and reporting.

4. Pricing and Costs

• Merchant Account: Merchant accounts often involve various pricing components, including transaction fees, account fees, and potential setup costs. The fees associated with merchant accounts can vary based on factors such as transaction volume, industry risk, and the selected payment processor.
• Payment Gateway: Payment gateways typically charge transaction-based fees or a percentage of the transaction amount. They may also involve additional fees for specific features or services, such as recurring billing or fraud prevention tools.
• PSP: PSPs offer pricing models that combine the costs of both merchant accounts and payment gateways into a comprehensive package. This approach simplifies pricing and provides businesses with a transparent overview of their payment processing expenses.

5. Processing Volume

• Merchant Account: Merchant accounts cater to businesses of varying sizes and processing volumes. They offer scalability, allowing you to handle large transaction volumes as your business grows.
• Payment Gateway: Payment gateways seamlessly handle transaction authorization, making them suitable for businesses with varying processing volumes. They provide the necessary infrastructure to accommodate fluctuations in transaction traffic.
• PSP: PSPs are designed to cater to businesses across the processing volume spectrum. Whether you’re a small startup or an enterprise-level corporation, a PSP offers the flexibility to handle your payment processing needs, allowing for scalability and growth.

6. Fraud and Risk Management

• Merchant Account: Merchant accounts typically provide businesses with a certain level of control and customization when it comes to fraud and risk management. You can implement additional security measures, such as fraud detection systems or 3D Secure protocols, to protect your business and customers.
• Payment Gateway: Payment gateways contribute to fraud prevention by leveraging sophisticated algorithms and risk assessment tools. They provide an additional layer of security through secure data transmission and real-time transaction monitoring.
• PSP: PSPs enhance fraud and risk management capabilities by combining the strengths of merchant accounts and payment gateways. They offer a holistic approach to security, incorporating advanced fraud prevention tools, secure data transmission, and robust risk management mechanisms.

7. Terms and Conditions

• Merchant Account: Merchant accounts involve specific terms and conditions that govern the relationship between your business and the payment processor. These terms cover aspects such as transaction fees, settlement periods, and dispute resolution procedures.
• Payment Gateway: Payment gateways also have their own terms and conditions, typically focusing on technical integration requirements, data security, and acceptable use policies. 
• PSP: PSPs combine the terms and conditions of both merchant accounts and payment gateways into a unified framework. This allows businesses to have a comprehensive understanding of their obligations and rights within the payment processing ecosystem.

 

Merchant Account vs PSP vs Payment Gateway: Which is best?

The truth is, there is no definitive answer. The best option for your business depends on your unique needs, preferences, and the specific goals you aim to achieve. 

So, let’s take a closer look at the strengths of each contender to help you make an informed decision.

Merchant Account: A merchant account is best for businesses that require:

• High account stability and direct control over funds
• Customized risk management solutions
• Negotiating pricing and choosing their payment processor
• Implementing additional security measures tailored to their needs
• High transaction volumes, specific industry requirements, or a desire for greater control over the payment process

PSP (Payment Service Provider): A PSP is best for businesses that need:

• Seamless integration and streamlined onboarding
• A consolidated payment processing solution
• Simplified pricing models that combine the functionalities of merchant accounts and payment gateways
• Comprehensive services, including payment processing, fraud prevention, reporting tools, and customer support
• Efficiency, ease of use, and a one-stop-shop for payment processing needs

Payment Gateway: A payment gateway is best for businesses that seek:

• Secure transmission and authorization of payment data
• Technical integration and compatibility with various platforms and payment methods
• Essential features such as encryption, transaction authorization, and real-time transaction monitoring
• Seamless payment experiences for businesses of all sizes, particularly those with lower transaction volumes or looking for a quick setup process

By understanding the strengths and best use cases for each individual component, businesses can make an informed decision based on their unique requirements and priorities.

 

Related Articles: 7 Things to Consider Before Choosing a Payment Gateway for Your Business
Top 9 Challenges in Online Payments and How to Overcome Them

 

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Our ZERO package, charging only $29/month and eliminating most processing fees, puts you in control of your payment destiny. 

It’s a game-changer that frees you from the burden of unnecessary costs and lets you focus on what truly matters—growing your business.

But that’s not all! You’ll also gain access to a powerhouse of services. 

Our comprehensive suite combines the stability of a merchant account, the efficiency of a payment gateway, and the convenience of a PSP. It’s the trifecta of payment processing prowess, tailored to your needs, and designed to elevate your business to new heights.

Experience the difference—a seamless integration that harmonizes every aspect of your payment ecosystem. Get started now.

 

 

Frequently Asked Questions (FAQs) 

We understand that payment processing can be complex, so here are quick answers to some commonly asked questions to shed light on the topic:

How can you get a merchant account?

You can get a merchant account by applying with a reputable payment processor, such as GETTRX. Fill out an application, provide the required documentation, and undergo a screening process to get approved.

How to set up a merchant account?

To set up a merchant account, follow these steps: choose a payment processor, complete the application, provide the necessary documentation (such as business registration and financial statements), and integrate the payment gateway with your website or point-of-sale system.

Can you accept credit card payments without a merchant account?

No, to accept credit card payments, you typically need a merchant account. A merchant account enables you to process credit card transactions and securely receive funds from your customers.

Is a bank a payment service provider?

No, a bank is not necessarily a payment service provider. While some banks offer payment processing services, we specialize in comprehensive payment solutions that go beyond traditional banking services.

What are the different payment gateways?

There are numerous payment gateways available, including popular options like GETTRX, PayPal, Stripe, and Braintree. Each payment gateway has its own features, pricing, and integration capabilities, so choose one that aligns with your business needs.

What is an e-commerce payment gateway?

An e-commerce payment gateway is a specialized payment solution tailored for online businesses. It enables secure online transactions, integrates with shopping carts, and provides a seamless checkout experience for customers.

Are payment gateways regulated?

Payment gateways are not typically regulated entities themselves. However, they are subject to compliance with industry standards, such as the Payment Card Industry Data Security Standard (PCI DSS), to ensure the secure handling of customer payment data.

Are payment gateways secure?

Yes, payment gateways prioritize the security of customer payment data. They employ encryption protocols, fraud prevention measures, and compliance with industry regulations to ensure secure and reliable payment processing.

If you have more questions or need further clarification, don’t hesitate to reach out to our knowledgeable support team. We’re here to assist you on your payment processing journey.